Solution for Implementing Board Diversity

In the wake of the global crisis, there is clear momentum towards changing the way that business is conducted—whether in the form of increased regulations, greater accountability or changing corpora ...

In the wake of the global crisis, there is clear momentum towards changing the way that business is conducted—whether in the form of increased regulations, greater accountability or changing corporate leadership. Such initiatives include changing the composition of corporate boards to include more women. What progress has been made on these initiatives and what would make them more effective?

Multilateral investment banks, government development banks and pension funds should bind their equity stakes to contractual clauses ensuring minimal gender equity on the boards of companies in which they invest.

Given the volume of investment made by development banks, whether international or national, they are in a unique position to influence the board composition of companies in which they have equity stakes. As key providers of finance they can take an active role in promoting gender diversity in these companies. They can do so either by requesting board seats equivalent to their investment stake in a company to be filled by women or by adding a "diversity" clause in contract agreements such as shareholder agreements that ensures a certain percentage of female directors on their boards after a certain grace period.

Why should these institutions do so? Because of their stated goal of promoting social and economic development as well as because their funds come from taxpayers in donating countries to multilateral banks or directly to national development funds. The International Finance Corporation of the World Bank is beginning to identify and appoint women to the boards of investee companies in different countries.

In the United States, large pension funds have begun to use their institutional investment strength to push for a larger voice in the election of board members, while at the same time creating a database of experienced directors with an eye towards diversity. State treasurers who oversee state pension funds have also begun to pressure companies based in their states on the issue of board diversity. In addition, since these investors are also relevant creditors of companies worldwide they could also create programs that provide loans with advantageous terms such as a reduction in interest rates, larger grace period or longer maturities—to companies committed with achieving a minimal gender diversity (e.g., at least 1/3 of each gender) on their boards after a grace period to be determined (e.g., 3 years after the date of the loan). Furthermore, a minimum level of board gender diversity (e.g., at least 1/3 of each gender) could be set as a prerequisite for approval of financing for large companies above a certain amount.